Download Chapter 11 - Department of Agricultural Economics

Government
Intervention in
Agriculture
Chapter 11
Topics of Discussion
Defining the “Farm Problem”
Government intervention
Consumer issues
Price and income support
Domestic demand expansion
Importance of export demand
Price and Income Support
A Historical Perspective
Loan rate mechanism
Set-aside mechanism
Target price mechanism
Conservation reserve mechanism
Commodities covered by government
programs
The “Farm Problem”
Inelastic demand and bumper crop
Lack of market power
Interest sensitivity
Trade sensitivity
Asset fixity and excess capacity
An increase in
supply causes
price to fall
sharply.
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If the demand
curve is more
elastic (D2), the
price will only
fall to price P2
rather than P3 for
a given increase
in supply.
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Recent Approaches
to Supporting
Farm Prices and Income
Market Level Effects of Loan Rates
Free market equilibrium
occurs at point E. Let’s
assume that PF is below
a politically acceptable
price, and that the price
desired by policymakers
is PG.
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Market Level Effects of Loan Rates
The Commodity Credit
Corporation of the USDA
began in the Thirties to
acquire excess supply at the
desired price its through nonrecourse loan provisions.
The goal was to shift demand
from D to D+CCCACQ, pulling
up the price from PF to PG.
Note that consumer demand
actually fell from QF to QD.
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Market Level Effects of Loan Rates
The CCC often stored the
surplus QD-QG in metal bins at
great expense to taxpayers.
This approach has the unwanted effects of increasing
supply from (QF to QG) in a
sector already plagued by
over production.
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Market Level Effects of Loan Rates
Consumer surplus would
decline from area 3+4+6 to
just area 6. Thus, they are
economically worse-off as a
result of this approach.
Producer surplus would
increase from area 1+2 to
area 1+2+3+4+5, a gain
of area 3+4+5.
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Firm Level Effects of Loan Rates
The individual firm under
free market conditions will
produce quantity qF if it
expected the free market
price PF, and earn profit
Equal to area 1.
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Firm Level Effects of Loan Rates
The increase in CCC
acquired stocks pulling
the price up to PG will
cause participating
farmers to increase its
production from quantity
qF to qG, increasing its
profits by area 2.
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Market Level Effects of Set-Aside Requirements
Free market equilibrium
occurs at point E1. Let’s
assume that PF is below
a politically acceptable
price, and that the price
desired by policymakers
again is PG.
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Market Level Effects of Set-Aside Requirements
Shifting the market supply
curve from SMKT to SMKT*
through set-aside requirements reduces production
from QF to QG. The market
equilibrium moves from E1
to E2.
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Market Level Effects of Set-Aside Requirements
Consumer surplus would
fall from area 4+5+6+7 to
just area 7. Thus, consumers
are worse-off economically.
Producer surplus would
increase from area 1+2+3 to
area 1+6. As long as area 6
is greater that area 2+3,
producers are better-off.
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Market Level Effects of Set-Aside Requirements
Importantly, the set-aside
approach does not encourage
production of quantity QS as
the CCC loan rate approach
did.
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Firm Level Effects of Set-Aside Requirements
The individual producer
under this approach would
supply qG rather than qF
or qS.
Profit would increase
over free market levels as
long as area 4 was greater
than area 2+3.
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Deficiency Payment Mechanism
The deficiency payment was equal to quantity QM
multiplied by the difference between the announced
target price and either the loan rate or market price
(blue shaded area above), which ever was higher.
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Deficiency Payment Mechanism
To receive this payment, the farmer had to
participant in the Acreage Reduction Program
(ARP) which implemented the set-aside
requirements. The Findley amendment reduced
this payment by 15%.
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Importance of Government Payments
To Net Farm Income
With payments
Without
payments
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Importance of Government Payments
To Net Farm Income
Pre FAIR Act
FAIR Act
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Importance of Government Payments
To Net Farm Income
Pre FAIR Act
FAIR Act
Lowered safety net
under FAIR Act…
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Current Farm Bill
 New legislation signed into
law May 13, 2002
 2002 Farm Security Act
 Policymakers searching for a
“countercyclical” approach
that retains many of the
“freedom” features of the
1996 FAIR Act
 Enhancing risk management tools by rethinking
insurance
Demand Side Options
Consumer Issues
• Adequate and cheap food supply, food access
• Food Subsidies
– Food stamp program
– National school lunch program
– WIC
• Food Safety
• Nutrition and Health
– Obesity issue
– Nutritional Labeling and Education Act (NLEA)
U.S. Nutrition Labeling and Education Act of
1990: A Model for the Rest of the World
•
•
•
•
update list of nutrient, ingredients
standardize serving sizes
define nutrient content claims
define health claims
Aims of NLEA
• promote consumer nutritional education
• enable consumers to make more healthful
food choices
• provide incentive to food industry to create
innovative and healthier new products for
consumers